Facilitation on the rise
This is an excerpt from "Smaller, cheaper, faster: Trading Asian equities", a supplement to AsianInvestor magazine's April edition.
Bulge-bracket firms are stepping up facilitation of equities trading in Asia-Pacific, in response to more demand from the buy side, according to numerous brokerage executives.
This trend goes hand in hand with the development of electronic trading. It is the flip side to the eternal struggle in Asia to find liquidity and trade blocks without disturbing the market.
“At one end of the spectrum you see large, negotiated block transactions, and at the other end you see clients accessing broker dark pools via direct market access” says Gene Reilly, managing director and head of Asia-Pacific equity execution services at Bank of America Merrill Lynch.
Facilitation is the process of providing a market for a security. Most brokers underwrite part of a trade for their bigger, most important clients – it’s often a loss-leader.
“For big clients, facilitation is back,” says Pierre Rousseau, Asia CEO and global head of equity brokerage at BNP Paribas Securities. “We do this to be a partner of choice.”
The demand reflects the fact that capital has become more expensive, which is another way of saying that liquidity in Asia is scarce. It has become difficult for investors to achieve their goals in the market. That can include sellers as well as buyers: a pension fund or a private-equity firm may come to market wishing to dispose of a block of shares. Or it may reflect a client’s insistence on speedy execution.
The trend also reflects a desire on both sides of the Street to deploy capital to Asia.
That is manifested in a gradual transfer of experienced traders from New York, London and other centres to Hong Kong and Singapore. This is true both of brokerages and of asset managers’ setting up dealing desks. “These people bring with them a mature mentality toward trading blocks,” notes Zach Tuckwell, Asia-Pacific head of electronic trading at Morgan Stanley.
In practice that means traders who know how to run risk capital as a portfolio, and hedge against the ‘fat tail’ events in Asia’s volatile markets. They are deploying hedges using other asset classes, such as commodities or foreign exchange, or derivatives trades and use of exchange-traded funds to gain or shed particular exposures, notes Adrian Valenzuela, head of liquid market equity sales at Barclays Capital.
Facilitation is a complicated strategy, however. It is generally a last resort, rather than a mainstream activity. “Clients are more sophisticated about waht type of liquidity they access,” says one broker. "But if they're moving sizeable positions, most still prefer natural liquidity."
Brokers agree that while demand for facilitation is growing, they have to be careful about using it. Precisely because Asian markets are often illiquid, facilitation increases the risk to their own trading floor.
Firms’ tolerance is only so great, and they’ll have to weigh to what extent a client is using the group’s services across products before agreeing to underwrite a trade. If it’s a very important client, the broker may agree to split some of the profits should they successfully unload the block.
Facilitation comes from two sources. First is from the equity capital markets desk. The ECM team may take on stock unloaded by a private-equity fund, a strategic shareholder or a company’s owner. They will then offer that stock to trading counterparties via a typical book-building process.
Or the trading desk’s buy-side client will be dealing in large blocks of stock. "They’ll request risk pricing from multiple brokers to execute quickly when liquidity is not available on the exchange, says BAML’s Reilly...
The full article is available in "Smaller, cheaper, faster: Trading Asian equities", a supplement to AsianInvestor's April edition. Subscribers can see the magazine here. For subscription information, please email Richard Santoro or call him on +852 3175 1980.